Where to Get a 4% Yield on the Cheap

Federal Reserve chairman Ben Bernanke is the best marketing strategist any dividend stock could dream of. The latest round of quantitative easing and word that the Fed intends to keep rates low through mid 2015 was another wet kiss planted on stocks such as Intel (INTC) and General Mills (GIS) whose dividend yields are well above Treasury rates.

But just because a stock offers a bond-beating dividend yield doesn’t ipso facto make it a smart investment. Just take a look at AT&T (T), a dependable dividend payer that income-crazed investors have bid up to a silly valuation. Look at the PE ratio.

Think that’s simply the price that you must pay today to have a shot at such an enticing dividend yield? Not necessarily.

Emerging market stocks that pay dividends offer a far better deal. The $4.4 billion WisdomTree Emerging Markets Dividend ETF (DEM) has a 4% yield and according to Morningstar, the average price/earnings multiple based on earnings estimates for the next 12 months is below 10. Compare that to one of the more popular U.S.-centric dividend ETFs, iShares High Dividend (HDV), that has a 2.9% dividend yield and an average 15 p/e based on earnings forecasts for the next 12 months.

Now that’s not to suggest you dump your core U.S. stocks and go all-in on emerging market stocks, but it is another argument for making sure you do in fact have exposure to emerging market stocks. And tilting it to dividend payers can be a best of both worlds approach. Take a look at how the Wisdom Tree Emerging Markets Dividend ETF stacks up against the Vanguard Emerging Market ETF (VWO), which tracks the MSCI emerging markets index, and has an average p/e of 10.5.

That’s just the price change. If we look at total return -- which adds in reinvested dividend payouts -- WisdomTree’s lead widens for the past five years. (The current 2.3% yield for the Vanguard Emerging Markets ETF is well below the current 4% payout for the WisdomTree portfolio.)

Now to be clear, the rocky road of the past few years gives a leg up to any strategy that loses less in down markets. So it’s not exactly surprising that an emphasis on stocks with dividend income would outpace a more growth-oriented strategy.

In roaring bull markets, such as the 12-month run from the March 2009 low, roles will be reversed.